The global economy and financial system are in turmoil and Britain's standing in the world has been questioned more than ever before. It is tempting to say this is the consequence of 30 years of both financial deregulation and of an erosion of family values. Anything, it seems, has become acceptable if it is market-friendly or politically correct. Thus a radical overhaul of economic and social thinking is needed.

There is an immediate need to get through the economic crisis. Perhaps the biggest surprise is that so many are surprised the recovery has stalled. Latest events are not the start of a new financial crisis but are a continuation of the one that began three years ago. This phase has been triggered by ineffective policymaking in the US and Europe; fragile financial markets that are vulnerable to poor news; and, perhaps most importantly, a catch-up with reality as the US realises how weak its recovery will be. Wall Street, it seems, is catching up with Main Street.

The world economy has two strong underlying and offsetting factors. One is the weak recovery in the west, although it would have been nonexistent were it not for the huge policy stimulus seen in recent years. Now that stimulus is wearing off and the west is suffering from a lack of growth as people continue to repay debts. Calls for spending cuts across Europe make the situation worse, not better, and raise the question: where will demand come from?

The second factor makes me positive about the global outlook. This is the strength of the emerging world, led by China. Last year emerging economies accounted for two-thirds of the increase in global growth and will remain its key force. Now, as never before, we are more dependent on what happens on the other side of the globe. Yet even China cannot ignore the business cycle, and after aggressive monetary tightening earlier this year, its economy is now slowing gradually.

Thus, America is drowning in debt, the euro area is imploding, Asia's economy is cooling and now London is burning. Is it any surprise that there is increased uncertainty, greater volatility and heightened risk aversion in financial markets?

Last week, the Bank of England governor, Sir Mervyn King, said the biggest threats to the UK were external. In the near term he is right, but the main challenge and greatest opportunity for the UK is how it changes from its current precipitous economic path.

External worries are that the US falls back into recession or the euro area implodes. If one happens, the other is likely to follow. A double-dip recession is usually triggered by an external shock, a policy mistake or a collapse in confidence. US confidence has been hit by the Standard & Poor's downgrade and the realisation that a long, hard slog lies ahead.

A greater risk is a collapse in the euro area. There are deep divisions within European political circles. This has raised questions about whether there is either the money or the political commitment to bail out Italy and Spain. A sovereign crisis would hit some banks hard, as they hold so many government bonds.

Thus there is a genuine risk of another global recession. Asia would not be immune, but at least it has plenty of policy ammunition to be able to cope, and rebound. But the policy cupboard in the west is pretty bare. Hence, the pressure falls upon central banks. There is, however, only so much they can do. The message last week was that US and UK interest rates will stay as low as possible, for as long as possible. While this is necessary, the Bank of England also needs to do more and engage in a further round of quantitative easing.

Britain also needs to build on the credibility gained with international investors from the chancellor's tough fiscal stance. We now need a growth strategy, framed within a vision of building a high-value, innovative and investment-led economy for the future. It needs more than words, but also money that must be spent sensibly.

The government should now seize this opportunity to borrow at low rates for increased infrastructure spending. This must include immediate spending on road, rail and airports, aimed at boosting growth across the regions and at encouraging private investment. We should supplement this by courting foreign sovereign funds to invest here.

There is also a need for spending on soft infrastructure, such as skills and education. Remember the talk of "education, education, education"? More like spin, spin, spin. According to UN data, the UK ranks 46th in education spending as a share of GDP and 75th when it is measured as a proportion of government expenditure. This doesn't fill one with hope about upward mobility for society and future growth prospects and job creation for the economy.

The UK economy is still in the top tier. Can we stay there? We have the fourth-highest income tax rate globally, but do we have the fourth-best public services? The public sector needs to change, as does the City. We are a trading nation, so let's start exporting more to the rapidly growing emerging economies. And we need to generate domestic-led growth and boost demand now, positioning the economy for future strength and prosperity.